Depletion for Working Interest, not land owners

[DaveinTexas]

My brain is drained this tax season, I hope others are staying sharp!

I have a new client that has several working interests in oil wells. The previous CPA missed a depletion allowance on his Schedule C for 2008 but did take the deduction on the 2009 return.

I explained to the new client that we "might" be able to amend the 2008 to take the legal deduction for depletion. I asked him why his previous CPA did not want to amend the return and he stated the CPA was nervous about getting the return audited. My thought is this is approx. a $30K deduction missed and should be simple to explain away in an audit.

Now I am thinking, is he even entitled to the deduction? He pays the land owners to lease the land for operating the wells (he does not own the land from which he is extracting oil).

Does he qualify to take a depletion allowance on his Schedule C for oil extracted on another person's land? Is he entitled to the deduction regardless if he owns the land or not?

Thanks buddies!

[jimmcg]

My brain is drained this tax season, I hope others are staying sharp!

I have a new client that has several working interests in oil wells. The previous CPA missed a depletion allowance on his Schedule C for 2008 but did take the deduction on the 2009 return.

I explained to the new client that we "might" be able to amend the 2008 to take the legal deduction for depletion. I asked him why his previous CPA did not want to amend the return and he stated the CPA was nervous about getting the return audited. My thought is this is approx. a $30K deduction missed and should be simple to explain away in an audit.

Now I am thinking, is he even entitled to the deduction? He pays the land owners to lease the land for operating the wells (he does not own the land from which he is extracting oil).

Does he qualify to take a depletion allowance on his Schedule C for oil extracted on another person's land? Is he entitled to the deduction regardless if he owns the land or not?

Thanks buddies!

If he has an economic interest in the income from the extraction of the mineral then the general answer is yes......See TTB p 9-21 for various details and cites.

[DaveinTexas]

Short and sweet

Thank you very much!

I can breathe again!

[Edward]

Thank you very much!

I can breathe again!

With so much money involved in this decision I believe I would move forward with caution on this one. Maybe you should think about working up an "Oil and Gas Depletion Schedule"; a "Cost Depletion Schedule" and also a "Tax Organizer - Oil & Gas Income and Deductions. These worksheets as well as alot of excellent info on OIL & GAS INVESTORS" can be found in Chapter 8 of the Quickfinder Individuals - Special Tax Situations. There is alot of oil exploration going on in Texas and I have already found excellent use for this reference publication.